Dan Lawton's $12 Million verdict against Big Government and its minions.

I recently learned of an absolutely astounding verdict that Dan Lawton, an attorney who I greatly respect and admire, obtained against a number of government employees who work for California's Department of Health Services (DHS). The employees were sued in their individual capacity, although I expect the State of California will write a check for their liability.

Dan Lawton and his colleagues represented a health care management company that operated the only hospital in Calexico. Due to the DHS's refusal to certify the hospital, it was unable to bill for services received, and ultimately went out of business. The owners of the management company sued the DHS employees and ultimately prevailed before an Imperial County Jury.

Lawton's case demonstrated the wrongful closure of the Calexico Hospital – the only hospital in the border city of Calexico, California. Calexico lies about 125 miles east of San Diego. Calexico has about 25,000 residents and is growing. CHMG formerly managed the Hospital for profit. State officials employed by the California Department of Health falsely promised to survey the Hospital for Medicare-Medi-Cal certification – then concocted a pretext for not doing the survey. The result was the Hospital’s inability to collect millions of dollars in reimbursements from the federal and State governments – and ultimate closure. CHMG sued these officials for violation of 42 U.S.C. section 1983 (deprivation of rights under color of law) and fraud. CHMG proved millions of dollars in lost profits as damages, through the skilled analysis of Dana A. Basney, C.P.A., CHMG’s damages expert.

Lamely, the defense did not identify a C.P.A. or economist as a countervailing expert witness.



Who was involved

CHMG is a California limited liability company. Its principals, Jay E. Ash and Randolph R. Smith, organized CHMG in 1996 for the sole purpose of managing the Hospital. As a direct result of the Hospital’s closure in 1998, CHMG lost all revenues or operations. Mr. Ash and Mr. Smith lost their entire investment in CHMG (collectively, about $150,000.00).


The owner of the Hospital is Heffernan Memorial Hospital District (the “District”). The District was not a party to this case. The District employed CHMG to manage the Hospital for profit pursuant to a written contract entered into in November 1996.

Defendants are all current or former State officials employed by DHS. Each had a role in the shutting of the Hospital in 1997. Now, they owe Mr. Ash & Mr. Smith, $12,000,000. They will also owe Lawton & Co. their attorneys fees, which will likely be substantial.

Background

When CHMG came on the scene in 1996, the Hospital (which had 34 beds) was shuttered and in bankruptcy.

The District’s directors wished to reopen the Hospital, but had no money and no plan. Messrs. Ash and Smith formed CHMG and made a proposal. The District accepted it. The District and CHMG signed a contract dated November 4, 1996. It provided for CHMG to run the Hospital. In return, CHMG would be paid 65% of the Hospital’s gross revenues. The contract had a 2-year term. All parties expected a renewal and (ultimately) a 5-year relationship.

CHMG set out to “change the model” at the Hospital – bringing in the highest quality physicians in Imperial County (including oncologists and surgeons); installing a first class laboratory; and providing a full-time pharmacist with a 24/7 presence. It began a seven-month process aimed at reopening the Hospital and getting a license from DHS. DHS issued the license after the Hospital passed a licensing inspection. The Hospital reopened on June 27, 1997. CHMG put its first patient in a bed that same day. Soon it was treating many patients – some of them insured, but many of them un- or underinsured.

All the Hospital needed was certification from DHS to bill and collect reimbursement for services from the federal and State governments (pursuant to their Medicare and Medi-Cal programs). Certification was a must for the Hospital. This was because so many of its patients were Medicare- and Medi-Cal-eligible – most of its anticipated revenues would be government reimbursements for the services it was providing, as had been true historically.



CHMG asked DHS for (and got) a certification survey in August 1997. The Hospital flunked the survey after a DHS evaluator flipped on an autoclave, temporarily tripping a circuit breaker and causing a power outage in part of the hospital – something that had never happened before. CHMG got the breaker re-set and all power restored within 30 to 40 minutes. No patient suffered any problem as a result of the temporary partial outage. Survey team leader Glenda Shekell, however, was not impressed. She ordered the Hospital to transfer its 25 patients elsewhere; cease operations; close the ER; and neither admit nor see any other patients until DHS certified all issues were corrected. The following day, DHS and a fire marshal inspected the facility; agreed that there was “no problem”; and gave the go-ahead to re-open (the next day). The 2-day closure cost the Hospital momentum at a critical time. It created a “great financial hardship” from which the Hospital never recovered.

Later, CHMG received a statement of deficiencies from DHS, and corrected all problems therein identified. By early October 1997, CHMG had corrected all deficiencies. It needed another certification survey so that it could start billing and collecting from the federal and State governments for the services it was providing to most of its patients.

In the meantime, CHMG had learned that Shekell and other DHS officials had a “great deal of prejudice against the Hospital.” CHMG heard reports that “individuals that were on the particular inspection team” were “anti-Calexico Hospital[,]” and that at least one of them “did not want the Hospital ever to be reopened.” Shekell, at her deposition, admitted to this prejudice. The District board believed DHS’ prejudice stemmed, in part, from the fact the Hospital treated a lot of undocumented aliens (and sought to do so at taxpayer expense). The Hospital’s close proximity to the border (ten blocks) meant that many residents of Mexicali, Mexico often sought care at the Hospital (in lieu of seeking care at a Mexican hospital).

By October 1997, Ash and Smith had “run ten months without an income stream.” They wanted assurances of fairness. CHMG had reached the limits of its credit lines and consumed $1.7 million of operating capital. Ash and Smith had put $150,000.00 in personal monies into the Hospital. They wanted an “honest conversation” with DHS officials before the next certification survey occurred. They called a meeting with DHS’ top-ranking local official (Joan Carmen-Briggs) and a supervisor (Nelsen Ford, who had been on the survey teams previously).

The meeting happened on October 16, 1997. Blunt words were spoken at this meeting.

Ash and Smith told Carmen-Briggs and Ford they didn’t want to keep borrowing and pouring cash into the Hospital if DHS’ true agenda was simply to shut it down – they’d rather shut the doors now and save everyone the expense and trouble. The Hospital needed another survey within 3-4 weeks and to get certified so it could start to collect the millions of dollars in accounts receivable it was accumulating for services to patients eligible for Medicare and Medi-Cal coverage. Ash and Smith explained their concern about the “anti-Calexico Hospital” prejudice amongst survey team members.

Carmen-Briggs and Ford “responded.” Carmen-Briggs assured Ash and Smith they would “have a fair certification survey,” and that it would be done within “two to three weeks . . . end of October . . .” Carmen-Briggs and Ford assured CHMG there would be a “fair survey” and a “level playing field,” with no “personal agendas by any state employees . . .” They acknowledged CHMG was “experiencing . . . financial difficulties in reimbursement” in the meantime.

Ash memorialized these promises in his letter sent to Carmen-Briggs the same day. Carmen-Briggs, at her deposition, admitted making the specific promise identified in this letter (a fair survey done within 3-4 weeks).

What CHMG didn’t know was that the assistant deputy director of DHS, Carla Framiglio, had made a secret decision in the fall of 1997 to revoke the Hospital’s license and close the Hospital. Though it was DHS policy to communicate such decisions in writing, Framiglio put nothing in writing – she told Carmen-Briggs and Donna Loza about it, but otherwise kept it to herself. Carmen-Briggs and Loza said nothing of Framiglio’s secret decision to Ash and Smith.


With Carmen-Briggs’ and Ford’s assurances in mind, CHMG prepared for the next certification survey. They filled out all necessary paperwork, including HCFA Form 855 (a form identifying the Hospital’s ownership to its fiscal intermediaries, such as Blue Cross), and submitted it to DHS. Ash and Smith signed personal guaranties of repayment of a $450,000.00 loan (gotten by the District to continue to fund operations in the meantime). They pledged their homes as security for the guaranties. CHMG used the loan proceeds to meet payroll, pay suppliers, and continue to treat all patients. As of early November, CHMG had sufficient funds left to continue to run the Hospital for another 30-60 days. After that time, it would die unless it could start collecting reimbursement from the federal and State governments.

CHMG awaited the promised survey.

It never came. The Hospital would have passed. It was in “A-1 condition.” All items noted as deficient during the August survey had been corrected.

Carmen-Briggs and Ford never followed up on their promises, nor did they tell anyone to do the survey they had promised to CHMG. Ford rotated off the survey team; Barry Giles (now Hitesvara Saravan) replaced him. Had Saravan been told to get a team together to do a survey, he “would have done everything possible to accomplish it.” Never having been told to do it, he did nothing.

Ford kept promising Smith he would “get on it” and “take action.” No “action” materialized. Weeks passed. When Ford told Smith that Saravan had replaced Ford, Smith called Saravan. Saravan “knew nothing about” any survey, except that a survey anytime soon was “off the table.” Saravan told CHMG there could be no survey until January or February 1998. Ash begged Saravan for a prompt survey, telling him that if the Hospital flunked it, Ash would personally carry the Hospital’s license to Saravan’s office and surrender it then and there. Ash told Saravan that the Hospital couldn’t afford to stay open until February and reminded him of Carmen-Briggs’ promise (of a fair survey within 3-4 weeks of October 16, 1997).

On December 4, 1997, a meeting ensued among the District’s board members, the District’s lawyer, most of the defendants, Framiglio, Ash, and Smith. At this meeting, DHS dropped a bombshell. DHS told Ash and Smith that, before any survey could happen, CHMG first had to obtain Blue Cross’ approval of its Form 855. DHS had never mentioned such a rule previously to CHMG. No paperwork given by DHS to CHMG previously had identified this as a prerequisite to a survey.

The Plaintiffs demonstrated at trial the truth: there was no such rule. The previous survey (in August 1997) had taken place without Blue Cross’ approval of any Form 855. None of the defendants, when deposed, could identify the source of such a supposed rule.

By now, the otherwise successful business CHMG and the only community hospital in Calexico was doomed by the DHS employees. There was no way CHMG get its Form 855 approved by Blue Cross, await a certification survey weeks or months hence, continue to treat patients and run up its accounts receivable, and survive financially in the interim. CHMG was dead. It had spent the entire $450,000.00 borrowed by the District in early November. It, Ash, and Smith were out of money. CHMG closed all operations at the Hospital on January 8, 1998.

The Hospital (which opened in 1951) remains shuttered to this day, except for an urgent care clinic operated in a part of the premises by Pioneers Memorial Healthcare District (which also operates a 107-bed hospital in Brawley).

The only California hospital ever closed as a result of the State’s failure to schedule a certification survey (or as a result of a hospital’s failure to pass a certification survey) is Calexico Hospital. Discovery has shown no instance of any fiscal intermediary (such as Blue Cross) ever not ultimately approving a hospital’s Form 855. DHS could have simply done a follow-up survey in October or November 1997; awaited Blue Cross’ approval of CHMG’s Form 855; and approved certification. Instead, DHS simply refused to do the survey at all – sealing CHMG’s doom.


Procedural Efforts

CHMG filed an administrative action with the State Board of Control, which failed to respond. CHMG timely filed their action on November 24, 1999 – over six years ago.

The trial court sustained defendants’ demurrer without leave to amend. CHMG appealed and prevailed; the Court of Appeal reversed the trial court’s dismissal, reinstating CHMG’s 1983 and fraud claims. Defendants moved for judgment on the pleadings. The trial court denied the motion. Defendants demurred to CHMG’s second amended complaint. The trial court overruled the demurrer. Defendants moved for summary judgment. The trial court denied the motion in its entirety (except for defendant Robert Hunt, as to whom the court granted summary adjudication on the fraud claim only).


Testimony from the Learned Professionals


CHMG’s regulatory experts testified that CHMG would have passed a fair certification survey in 1997. They also testified that the supposed Form 855 rule invoked by the State as a bar to a prompt survey did not exist in 1997 and that DHS never enforced such a supposed rule vis-a-vis any other hospital. Dana Basney testified that CHMG’s lost profits exceed $6 million on the low end based on CHMG’s actual daily patient census in August 1997 and industry data.


Defense expert John Hagerty (a former DHS official) will testify that DHS officials followed the rules and that the supposed Form 855 rule barred the prompt certification survey Carmen-Briggs and Ford promised in October 1997. Philip Dalton (not an economist or CPA) testified that Dana Basney’s assumptions are faulty and that the Hospital couldn’t have earned the profits it has projected. Guess the Jury didn't believe those two!

This hard work and dedication by the attorneys for the Plaintiff, and the steadfast patience by the Mssr's Ash & Smith resulted in a stunning $12,000,000 verdict. It also, likely taught the Department of Health Services carefully consider derailing those who would make a positive contribution to their community by succesfully operating a business.

A copy of the verdict, in PDF, is available at www.fearnotlaw.com at this link.